Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article.Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
US Equity Markets Break Out
What a wonderful week this was for equity investors! In fact, since the V-bottom on Friday, February 5, the stock market has moved up in a grinding, low-volume manner. That was also the story this week with most NYSE-based stock traders bemoaning the lack of volume. For 3 days, the stock market approached 1121 and then backed away giving confidence to bears. Then, on Friday, the S&P 500 took comfort from a non-terrible jobs number to cross 1121, 1125 and even 1132. If technicians are correct in their charts, there may not be much resistance until 1200.
The market action was the type we have written about, the 2006-2007 type grinding action that sucks volatility out of the markets, the precise type of action that results from liquidity-providing quantitative trading strategies. In 2007, this action continued to drive the markets higher and higher until July 2007. As a result, the Quant positions kept getting larger and larger until the bad news began making an impact on volatility. Then in August 2007, volatility spiked on some bad news and Quants were essentially blown up in those 2 infamous days of August 2007.
Will 2007-type action continue in 2010? So far, the parallels seem to hold.
Goodbye Greece
The Greece situation essentially stopped impacting the US stock markets in mid-February. This is eerily similar to the way the stock markets greeted the first outbreak of the subprime crisis in February 2007. Now, as then, the stock markets assumed that these crisis were contained and that they would not cause any problems for corporate earnings or global growth. The contagion factor was considered unrealistic and ignored because the initial problems were confined to about 2% of their sectors.
As we all know, in 2007 the contagion from subprime kept spreading into other sectors like leveraged loans. The economy kept getting weaker under the complacent or somnambulant rally of the stock market until we all woke up and the stock market started throwing up.
Will we see a repeat of this phenomenon in 2010 if or when the Dubai-Greece issues prove to be the tip of the contagion? Will we see a repeat in the other members of the PIIGS circle? Or will we see something come up in China?
Hello Again China
This week began with the CLSA Asia-USA conference in San Francisco. Christopher Wood, the well regarded seer of CLSA, gave the consensus view that Asian economies will win because of fiscal strength and smart management. Mr. Wood prophesied that USA will suffer a currency armageddon in about 5 years. Mr. Wood did state that in the short run the European crisis will feed dollar strength against the Euro but that the end game of the crisis will be in the USA. To hedge against this risk, Mr. Wood advised investors to own gold bullion, gold stocks and Asian & Emerging Markets equities (see clip 1 below). This was also the advise of Marc Faber who asked viewers to buy some Gold every month forever.
The case of Mr. Wood and his cohorts rests entirely on China. As he said “If China blew up, it would be very negative for all of Asia and all of Emerging Markets. My view is China is not going to blow up, but grow between 8 & 9% this year, this is incremental tightening and incremental weakness and it presents a great buying opportunity”
For another view on China, see the comments by Professor Victor Shih of Northwestern University in the Bloomberg article China’s Hidden Debt Risks 2012 Crisis . In this article, Prof. Shih argues that China’s hidden borrowing would push China’s government debt to 96% of GDP next year. If true, this would translate into a much weaker Fiscal situation for China than what Christopher Wood believes.
Last week, we had the pleasure of meeting some European investors, the type that invest with the best and brightest of hedge funds. Uniformly, they articulated the various fears about China but professed complete confidence in the ability of the Chinese leaders to manage these problems without damage to financial markets. Yet, none one of these investors showed much confidence in the ability of American leaders to manage the US debt situation.
That, folks, is the quasi-religious tenet of global stock markets today. The resilience of equity markets is based on this supreme confidence in Chinese leaders. If this confidence wavers, the action in the global stock markets will feel like an earthquake.
Rising Geo-Political Tensions and Defense Expenditures
As any casual reader of this Blog can observe, geopolitical analysis is one of our favorite pastimes. We have described at length the rise in military tensions between China & India and the consequent rapid rise in military spending by India.
This week we came across a similar article about China’s northern border, with that darling of frontier markets, Vietnam. We were surprised to read that Vietnam was Russia’s best customer for its arms exports in 2009. The article discusses an emerging military relationship between Vietnam and Russia to counter the increasingly ominous shadow of China. Vietnam is currently embroiled in a dispute with China about oil exploration around Spratly islands.
On this topic, we learned last month that Japan has taken its territorial dispute with China about waters of China Straits to the International maritime agency. Japan, Vietnam and India – this could possibly feed Chinese fears of encirclement with uncertain consequences.
All this probably has nothing to do with the rise of Asian markets in 2010, but these are developments that at some point will reduce multiples. Add these to what we believe are increasingly tenuous fiscal situations in China, Vietnam, South East Asia, India and you might begin to believe that USA might be an island of relative fiscal safety after all. Take that, Mr. Wood.
Treasuries – Parallels to 2007?
We remind readers of our comments of February 20 when we discussed the parallels of the December 2006-June 2007 sell off in Treasuries (with short term rallies in January & February). So far, the parallels seem to be working. Treasuries ended the month of February with a rally. March has begun the way February began, with a sell off.
As we have noted before, the months of April & June have been pivotal for the Treasury market since 2003.
- In 2003 & 2005, the Treasuries rallied furiously from April to June. The peak of Treasury prices and lows of treasury yields were reached in June. The months of June to November saw a steep sell off in Treasuries in 2003 and 2005.
- But the action in 2004 & 2006-2009 was just the opposite. Treasuries sold off from April to mid-June in these years to create great buying opportunities in June. Then the Treasury market mounted huge rallies from June to November.
For some reason, fundamentals or valuation do not seem to matter for the price action from April to June. The risk tolerance of investors and their conviction in global growth as well as US inflation expectations seem to be the main factors.
Speaking of fundamentals, the Wall Street Journal informs us in its article BlackRock Plays It Safe: Treasurys that the brilliant firm has moved its Treasuries position to Neutral from last year’s Underweight position. At the same time, the article states that BlackRock has “meaningfully” reduced its overweight positions in other fixed-income assets, such as corporate bonds and mortgage-backed securities. This is exactly what Curtis Arledge, BlackRock’s Fixed Income CIO, told CNBC Fast Money viewers on February 19 (see clip 1 of our videoclips article of February 20).
On the other hand, we note that, based on this week’s CFTC data, small speculators now hold their largest long position in 10-Year Treasuries. Small Speculators have not proved to be particularly savvy in trading and this statistic worries us.
So what happens to Treasuries from April to June this year? We will know in a month or two.
US Economy
We are increasingly troubled by the turn in the economic data we see. House prices have turned weaker and so have some leading economic indicators like the ECRI indicator. Readers might recall that the ECRI indicator was the first one to show a rapid rise last summer. That was when every financial network featured the experts from ECRI to trumpet the signal from their leading indicator.
We do not have access to ECRI or its research. So we tend to depend on other authors to comment on the ECRI indicators. Based on the comments of these authors, we understand that the yearly growth in the ECRI leading indicator hit a new low this week.
The US Monetary Policy Forum has created a new Financial Conditions Index (“FCI”). This FCI also suggests a greater drag on the economy going forward. This is a brand new index that was created by experts and presented to the Fed during the last week of February.
If these indicators are as good as their creators argue, then the much awaited dip in the second half of 2010 might indeed materialize.
At least, so argued Richard Fisher of the Federal Reserve in an CNBC interview this week (see clip 5 below).
Featured Videoclips
Sometimes we get asked why we focus on CNBC videoclips. We have the longest experience in watching CNBC and so we can, we feel, comment better about the behavior of CNBC Anchors. Secondly, CNBC does get its first choice of guests given its lead network status. But the CNBC website is also a critical reason for our focus. CNBC posts virtually every segment of CNBC TV on its website. This helps us when we are traveling overseas and we cannot watch CNBC live. For example, we cannot watch CNBC Fast Money when in Europe. So we tend to watch the show the next day via clips on the CNBC website. How we wish Bloomberg & Fox Business follow this practice?
We feature the following clips this week:
- Christopher Wood of CLSA on Monday, March 1
- Barton Biggs of Traxis Partners on Monday, March 1
- Jing Ulrich of JP Morgan on Wednesday, March 3
- Thomas Hoenig of Kansas City Fed on Tuesday, March 2
- Richard Fisher of Dallas Fed on Tuesday, March 2
- Jersey Shore Cast with Jay Leno on Wednesday, March 3
- Monica Hesse on Washington Post on Tuesday, March 2
1. Greed & Fear – Christopher Wood of CLSA on CNBC Power Lunch – Monday, March 1
We have discussed some of the comments of Mr. Wood in our overview section Hello Again China. But his coup de grace is below:
- “My view is there is an inevitable end game as a result of all this massive spending of taxpayer money in the western world & Japan to bail out bankrupt banking systems, my view unfortunately is that the end game will be a systemic government debt crisis in the western world…it will probably happen in Europe and I think it will climax in the US and I am expecting on a five year view the collapse of the US dollar paper standard”
This is the sort of stuff that makes people like Mr. Wood well-regarded in the investor world. Our simple question is why does not all of this apply to China? It is a reasonably well documented and supported view that Chinese Banks are loaded with bad debts and nearly bankrupt based on a apples-to-apples comparison with US banks. China has spent taxpayer money even more massively than America to support its own banks. In addition, China is in a much weaker position than America in terms of its dependence on other nations and for its resource lifeline.
So why doesn’t Mr. Wood predict a systemic debt crisis in China as Mr. James Chanos does?
- The first answer is that Chinese leaders are smart and intelligent while the American leaders are not. As Nassim Taleb said so eloquently in Davos that every human being should short US Treasuries as long as Bernanke & Summers are in office (see clip 5 of our February 1- February 6 videoclips article).
- The second answer is that China is not a democracy. So they presumably can do what they like to solve their problems without sharing the nature of their solutions with any one. America is a democracy and it needs popular support as well as Congressional approval. Our own simplistic view is that this chaotic system prevents America from making a huge mistake. We do think that the all powerful Chinese leadership could quite possibly make a gigantic mistake as most dictators have ended up doing.
We are willing to make a wager with Chris Wood. We will look at this issue in 5 years. Our bet is that the American financial system & the American Dollar will be in a better shape than the Chinese financial system & the Chinese Remnimbi in March 2015.
Will Mr. Wood take this bet?
2. Biggs’ Big Picture – Barton Biggs with CNBC’s Mark Haines – Monday, March 1
Barton Biggs, Managing Partner of Hedge Fund Traxis Partners, was the Global Strategist at Morgan Stanley for many years. Mr. Biggs is an interesting and entertaining speaker. He is also an astute investor. Mr. Biggs was at the CLSA conference and offered his views on China as well as the need to own farmland & gun. We are not kidding.
- What is happening today is sort of a spontaneous combustion in a compost heap, there are a lot of bad things in the compost heap but there are some good things too..
- No it (China) is not a massive bubble; it is the real thing and eventually China may well be a massive bubble but that could be years away from now and for the time being the situation in China looks very healthy, yes, they are tapping on the brakes as they should be doing and doing some incremental tightening but the economy is basically is so healthy that domestic demand is picking up so strongly that there are gonna do the forecasts of the experts here somewhere between 11% and 8-9% real growth this year
- somebody that has a significant amount of wealth in the world today, a good way to hedge against bad things happening is to own some farmland and a gun, yeah
Yeah, indeed.
3. China Fears Unfounded? Jing Ulrich with Maria Bartiromo – Wednesday, March 3
Ms. Ulrich is the chair of Chinese Equities for JP Morgan. Her views are traditional consensus views about China & its markets.
4. Hoenig: Man at Center of Rate Debate – Thomas Hoenig with CNBC’s Steve Liesman – Tuesday, March 2
Mr. Thomas Hoenig is the President of the Kansas City Fed. He is currently the most hawkish member of the Fed. A summary of his views can be found at Fed Should Raise Interest Rates Sooner Than Later: Hoenig on cnbc.com. A couple of his quotes are below:
- “I think we shouldn’t be guaranteeing the markets a zero rate for an extended period. I think the crisis of a year ago has passed. We’re in recovery,”
5. Dallas Fed President Speaks – Dallas Federal Reserve President on Squawk Box – Wednesday, March 3
A summary of Mr. Fisher’s comments can be found at Banking Giants Should Be Broken Up: Fed’s Fisher on cnbc.com.
6. Jersey Shore Cast on The Tonight Show with Jay Leno – Wednesday, March 3
This videoclip is about investing, it really is in a way. So just check it out, will you? Many thanks to CNBC Power Lunch for bringing this clip to our attention.
7. Save a City: Tax Tattoos – Monica Hesse, Washington Post Style Editor on CNBC Power Lunch – Tuesday, March 2
Monica Hesse and the Power Lunch crew discuss a proposed bill in Minnesota that seeks to levy taxes on tattoos, body piercings, manicures and facials. Monica Hesse is a rarity, a print journalist who comes across as funny, witty and charming on TV. This is a fun clip to watch. Thanks PowerLunch.
